oktober 25, 2010

The second edition of my book Finance!

The second edition of my text book Finance – Markets, Instruments & Investments is now in print! The book is available here and (soon) here.

The timing of the first edition was perfect (kind of...); it was printed three years ago and hit the bookshelves two months after the start of the financial crisis in the summer of 2007! I hope the financial system will undergo less change in the next three years than it did during the last three years……

oktober 19, 2010

Man against machine - Norwegian style!

1997 slog schackdatorn Deep Blue den Baku-födde schackvärldsmästaren Garry Kasparov (född Garry Weinstein) och vägrade sedan Garry en returmatch. Även om människan i detta fall anklagade datorn för att fuska kvarstår faktum att maskinen slog en av mänsklighetens mest briljanta hjärnor! Detta leder oss osökt till nyheten om att två norska daytraders i förra veckan lyckades slå dagens "motsvarighet" till Deep Blue (Deep Blue var en superdator och även om den också var programmerad i högnivåspråket C så haltar förstås jämförelsen något).

Den senaste veckan har dessa day traders valsat runt i media för deras lyckade försök att slå maskinen, i detta fall en dator programmerad med algoritmer konstruerade för att tjäna pengar på aktiehandel. Jag har försökt att försöka förstå vad dessa två norska day traders har gjort för något olagligt. Jag har dock inte lyckats förstå vad det är!

Kan någon hjälpa mig?

För er som inte vet vad jag pratar om kan vi sammanfatta det hela (så ovinklat jag kan förstås). Tydligen har två unga day traders i Norge lyckat hitta ett mönster i hur en stor amerikansk institutionell investerare programmerat sina datorer att handla. Dvs de två homo sapiens har alltså lyckats knäcka en dåligt programmerad algoritm använd i så kallad algorithmic trading. Tydligen har norrmännen (helt oberoende av varann) funnit mönster i bid och ask spreaden och följdaktligen kunnat handla upp aktien genom att successivt lägga order efter order högre och högre men med minskande insats varje gång. Då algoritmen tydligen reagerade på externa trades på samma sätt oberoende av de externa tradesens storlek kunde norrmännen köpa mindre och mindre för varje trade och därmed få ner genomsnittspriset de köpt för innan de plötsligt sålde (med vinst)! På detta sätt har de tjänat typ en halv miljon kronor, dvs lika mycket som den amerikanska investerarens chef troligen tjänar på två veckor! För detta fick norrmännen villkorlig dom samt böter i samma storleksordning som de vinster de gjort.

Vad jag undrar är hur detta skiljer sig från det algoritmhandlare tjänar pengar på? Är det inte just denna typ av mönster de försöker hitta? Och utnyttja för att tjäna pengar? Dvs hur skiljer sig algo-traders dagliga värv från norrmännens “hobby”? Jag misstänker att denna dom kan få långtgående konsekvenser för utvecklingen på algo-trading området. Jag misstänker också att de två norrmännen inte kommer att få svårt att få jobb i finansbranschen efter detta!!

Som sagt, jag säger inte att norrmännen är oskyldiga, bara att jag inte förstår varför de är skyldiga! Kan någon hjälpa mig?

oktober 14, 2010

Fixed Income relative value trading is back!

For all of you who remember Long Term Capital Management, the huge hedge fund that collapsed in late 1998, it could be interesting to hear that their (original) trading strategy is back on track after more than a decade in the shadows!

Long Term was the financial poster child of the 90s; the fund was managed by the famous Salomon Br. trader John Meriwether, it was co-run by J.M.s old Salomon friends Hilibrand, Haghani and Rosenfeld and, most impressively, had two Nobel laureates as partners, i.e. Merton and Scholes, the options pricing gurus!

Long Term used complex models to make money on government bond prices in major countries converging over time. Of course, the pricing errors in US, Japan and EU government bond markets are typically extremely small so the trades had to be done with a lot of leverage to boost the returns. That was also the way Long Term liked to do it and their debt was often ten or twenty times their equity. Towards the end their leverage ratio was as high as 100! Due to this humongous leverage, the fund returned enormous amounts of money to the investors, and to the partners, and it was not until the Asian crisis in 1997 that the luck turned against them all. With the Russian debt moratorium in 1998 the rumor spread that Long Term had trouble and since they were the biggest player at the time (bigger than Goldman for instance) it meant that the fund behaved like an oil tanker; it needed weeks/months to change direction. Everyone knew that everyone knew (etc.) that long Term was in trouble and that just led traders to start taking opposite trades. To make a long story short; Long Terms risk management mistakes together with an (ir)rational market forced the Fed to orchestrate a takeover of the fund by a consortium of Wall Street banks. Since then, fixed income relative value trading has had a bad name.

Until now, that is! In fact, it is not too surprising that fixed income relative value trading (fixed income arbitrage) is back in vogue considering the market intervention of governments all around the world. It is exactly in times such as these when treasuries and central banks around the world behave irrationally and erratically (if you ask me) that directional trading in government bonds, currencies and “policy” is motivated. As a result, I would assume that even the leverage ratios, i.e. the risk, can be kept low these days. And when it comes to the results, Hedge Fund Research claims that the strategy returned more than 5% over the first six months of 2010 and that is almost four times as high as the average hedge fund. My guess is that the strategy will continue to do well!

oktober 06, 2010

Go east, boys and girls!

I am now back in Lund after having visited Zhejiang University in Hangzhou. Overall, I had a great time! See this link for my paper presentations at Zhejiang University.

I have been to China a couple of times before so I think I can say with some degree of certainty that I am truly impressed with the speed with which that country develops. Last time I visited China was in 2004 (Shanghai) and you can really touch the difference! Both Shanghai and Hangzhou gets more and more the feeling of Taipei, Bangkok, Kuala Lumpur or Tokyo. Since I lived in a leafy up-market part of Hangzhou I sometimes (N.B., sometimes….) even thought I was in Tokyo! It was fairly quiet, green and everywhere there were quiet 6-cylinder Mercedes-clones with automatic gear boxes sneaking up on you. OK, let’s not exaggerate things (everything is certainly not wonderful for an expat living in China and much of my praise is relative rather than absolute), but I must recommend all the younger readers of this blog to start learning Chinese! It is so obviously the most important language after English. As for Italian, French and perhaps even Spanish: go hide yourself in some dark osteria, dusty old tapas bar or chilly wine cellar. You are so “over the hill”……

Don’t make any mistake about it though: I am not advising anyone to buy a sizeable piece of China corp. right now. As obvious as it is that China is a giant in the making, equally obvious it is that it is all one giant bubble at the moment. The stock market is inflated, the housing market is crazily overpriced and the currency is probably grossly undervalued. At least if you ask me! Like so many others I really want a piece of the action but I will not buy anymore until prices have corrected themselves downwards. I do not pretend to be an expert after a month in Hangzhou but many civil servants I talked to claim that they have to flip property since their salary is too low to live on! Well, that’s a hell of a recipe for disaster……


To finish this blog I want to lecture you somewhat on Hangzhou and Zhejiang University :)

What most of you probably don’t know is that Hangzhou is a former Chinese capital and the major tourist destination among Chinese people. It is a beautiful city (well, around the famous West Lake at least) close to Shanghai that has not rested on its laurels. It is for instance the home to the head quarter of the, at least in Sweden, now notorious car factory Geely; the company that bought our national treasure Volvo, one of the Vs in the Swedish middle-class dream (Villa-Vovve-Volvo, i.e. to have your own house, dog and Volvo)! Depending on who you ask, the population of Hangzhou is at least a couple of millions, sometimes as many as 8 millions including the whole “commune”. That, ladies and gentlemen, is, give and take, all the Swedes in the world in one place the size of Stockholm. And this is considered a small city by Chinese standards!

What most professors among us probably do not know is that Zhejiang University (I can still barely spell the name correctly....) is the Princeton of China! It is not the best university in China (i.e. the Harvard of China) and it is not the second best (i.e. the Stanford of China), but it is one of a handful that considers themselves number three in China! The quality of the students mirrors this and it is a bit strange that so few outside of China know about this. I guess they have to rename the university to make a dent in the psyche of the ordinary professor in the rest of the world….

oktober 04, 2010

Hans hemma igen!

På förekommen anledning vill jag påpeka att anledningen till att jag inte skrivit något under min tid i Kina inte varit att jag inte velat. Anledning är helt enkelt att min blog är censurerad av de kinesiska myndigheterna! Det går helt enkelt inte att öppna den i Kina. Trist men sant……

ps. Jag återkommer med en rapport om Kina inom kort.